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Question 6 A. Gigi recently inherited some bonds (face value $100,000) from her father, and...

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Finance

Question 6

A. Gigi recently inherited some bonds (face value $100,000) from her father, and soon thereafter she became engaged to Adrian, a Bond Business School marketing graduate. Ralf wants Gigi to cash in the bonds so the two of them can use the money to live like royalty for two years in Monte Carlo. The 2 percent annual coupon bonds mature on December 31, 2037, and it is now January 1, 2018. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 7 percent. If Gigi sells her bonds now and puts the proceeds into an managed fund that pays 5 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (that is, two payments, the first payment today and the second payment one year from today)?

B. Cost of Capital always depends on the risk of the project being evaluated. Therefore company costs of capital are useless. Is that correct? Evaluate the statement.

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